PPPs are used to convert the final expenditures on GDP reported by countries into real expenditures. The converted expenditures are called real because, being valued at a uniform price level and expressed in a common currency, they reflect only real or actual differences in the volumes purchased by countries. PPPs and real expenditures provide the price and volume measures required for international comparisons of GDP and its constituent expenditures.
The table below shows expenditure on GDP at national price levels in national currencies for three countries, the PPPs used to convert them to real expenditures at a uniform price level in a common currency (dollars) and the population of countries and their and exchange rates. The table refers to GDP, but the computations are the same for any of the component expenditure of GDP.
Expenditure on GDP at national price levels in national currencies (billion)
Exchange rates (1 dollar = .… national currency units [NCUs])
GDP PPPs (1 dollar = .… national currency units [NCUs])
Real expenditure on GDP at a uniform price level in dollars
Indices of real expenditure on GDP(country A = 100)
Real expenditure on GDP per head at a uniform price level in dollars
Indices of real expenditure on GDP per head (country A = 100)
Price level indices for GDP (country A = 100)
Three sets of indices have been derived using these data. The first are the indices of real expenditure. These are volume indices. They reflect the relative size of the real expenditures. At the level of GDP are used to compare the economic size of countries. The second are the indices of real expenditure per head. These are standardized volume indices. They allow the real expenditures to be compared after adjusting for the differences in the size of population. At the level of GDP, they are often used to compare the economic welfare of populations.
The third are the price level indices. These are the ratios of PPPs to exchange rates. They provide a measure of the differences in price levels between countries by indicating for a given real expenditure the number of common currency units needed to buy the same volume in each country (100$ in A, 115$ in B and 45$ In C). At the level of GDP, they provide a measure of the differences in the general price levels of countries.
Note that, although the indices have country A as a base country, they are not affected by choice of base country and can be rebased on country B or country C. In other words, they are base country invariant. The base country serves only as a point of reference.